Government borrowing at lowest level for any June since 2008 as higher pay boosts to income tax receipts

Public sector borrowing fell by £800million last month to the lowest level for any June since 2008 after higher national wages boosted income tax receipts, according to official figures released today.

The Office for National Statistics said government borrowing - excluding the effect of bank bailouts – fell to £9.4billion in June, down from £10.2billion pounds a year earlier, albeit above economists' forecasts of £8.5billion.

Howard Archer of IHS Global Insight said: ‘While June's improvement was slightly less than had been expected, Chancellor George Osborne is still likely be pleased to see the shortfall on the public finances narrow for a sixth month running.’

Good news: Today’s numbers were the first set of public sector finance figures since Chancellor George Osborne's summer Budget two weeks ago

Treasury coffers were boosted by a rise in income tax receipts to £11.5billion, the best June performance on record since 1997. Meanwhile the corporation tax take of £1.7billion also represented the best June on record.

Martin Beck, senior economic advisor to the EY ITEM Club, said: ‘Today’s figures mean that the public sector deficit has now fallen in each month of 2015 with another month of strong growth in tax receipts boosting the UK’s fiscal position.’

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Today’s monthly government borrowing figures also saw a £117million boost from a fine paid by Lloyds Banking Group over its handling of payment protection insurance complaints.

The increase in income tax follows a period in which the take had failed to grow by as much as expected despite the strength of the UK's economic recovery, though it now appears to be pushing higher again helped by improvements in earnings.

Pay rates are rising at the strongest rate since April 2010 and with inflation hovering around zero that means people are seeing their real incomes rise faster than at any point in the last seven years.

ONS figures published last week showed that average weekly earnings grew by 3.2 per cent year-on-year in the three months to May, up from 2.7 per cent in the three months to April, and well above the pre-financial crisis norm of around 2.5 per cent.

The increase in wages has heightened the possibility that the Bank of England could consider hiking UK interest rates from current record low levels of 0.5 per cent in the near future.

BoE governor Mark Carney said in a speech last week in Lincoln: ‘The decision to start such an adjustment will likely come into sharper relief round the turn of this year.’

Rate hint: Bank of England governor Mark Carney (pictured) said in a speech last week in Lincoln: ‘The decision to start such an adjustment will likely come into sharper relief round the turn of this year.’

The comment was widely seen as a hint that rates could rise at the end of this year or early in 2016.

The latest minutes from the bank’s July Monetary Policy Committee meeting are due to be published tomorrow, and will be scrutinised for any further hints on the likely date of a rate hike.

On currency markets, the pound has been boosted recently by Carney’s comments, although with some caution ahead of the MPC minutes it was slightly lower today, slipping to $1.5542 versus the dollar and €1.4309 against the euro.

Today’s numbers were the first set of public sector finance figures since Chancellor George Osborne's summer Budget two weeks ago, which saw the Office for Budget Responsibility suggest underlying borrowing for 2015/16 will fall to £69.5billion from £88.2billion in 2014/15, a drop of 21.2 per cent.

For the fiscal year to date from April to June this year, borrowing stands at £25.1billion, £6.1billion lower than a year earlier and the lowest year-to-date borrowing for the period since 2008/9. However the improvement of 19.6 per cent is slightly behind the scale pencilled in by the OBR.

Meanwhile underlying debt stood at £1.51trillion, the highest on record, and as a percentage of gross domestic product it was 81.5 per cent, just behind last December's record high of 81.6 per cent.

The level was swollen after figures took account of the worse-than-expected state of Government-owned Network Rail's balance sheet, which added £100million to national debt for 2014/15.

A Treasury spokesman said: ‘Today's figures show that our deficit reduction plan is working, with cumulative borrowing over £6billion lower than at this point last year.

‘We have more than halved the deficit, but with debt over 80 per cent of GDP the job is not done.

‘That is why we will continue to work through our long-term plan to achieve a budget surplus in normal times and secure a better economic future for working people.’

Old Lady: The latest minutes from the Bank of England’s July Monetary Policy Committee meeting are due to be published tomorrow, and will be scrutinised for any further hints on the likely date of a rate hike

While the Government claims it has halved the deficit, this relates to borrowing as a percentage of GDP since 2010 rather than the level of borrowing itself.

Samuel Tombs of Capital Economics pointed out that the fall in borrowing for June was just 8 per cent, compared with the OBR's target for the deficit to fall at nearly three times that pace.

He said if the trend persisted, the 2015/16 borrowing figure would miss the forecast by £2billion.

‘However, estimates for borrowing in the first few months of the fiscal year should be taken with a pinch of salt,’ he added.

‘Accordingly, we do not think that June's borrowing figures should ring any alarm bells yet.’

And David Kern, chief economist at the British Chambers of Commerce, said today's figures showed welcome progress on cutting the deficit.

‘However, we must not understate the big challenges that the UK faces in restoring stability to our public finances,’ he added.

‘Britain's financial sector was hit hard in the recession and, together with lower oil and gas output, our ability to generate tax revenues has been seriously constrained.

‘Therefore, we have to continue to focus on other means to tackle the deficit - including cutting current government spending.’